By Laine Wagenseller
The author has permitted the reprinting and redistribution of this article.
When partnerships sell commercial property, industry professionals must secure the written authorization of all the partners or co-owners on both listing and purchase agreements to ensure that contracts are legally binding. If such an action is not possible, brokers or agents also can obtain a written agreement signed by the other partners, granting one partner the right to enter into the listing agreement and sell the property.
Failure to show written partnership consent can torpedo a transaction and even lead to opposing decisions within the courts. In the case of Elias Real Estate, LLC v. Po-Tsung Tseng, in which the California appellate court reversed the lower court’s decision, no sale took place and both parties were sued – a lose-lose situation, all because of the failure to get the appropriate authorization of all partners. Although this case involved partners living outside the U.S., commercial real estate professionals should be mindful that no amount of physical distance should deter them from getting written authorization from all partners.
In 2004, Arthur Tseng met with a Fox Realty broker to sell a warehouse in San Pedro, Calif., that he owned with his three brothers as tenants in common. While Tseng was a naturalized U.S. citizen and lived in California, his three brothers lived and worked in China. The family clothing import business leased the property from the brothers.
The broker knew that Tseng was not the sole owner of the property but was assured by him that all the brothers had authorized him to sell. However, the broker did not request written authorization of that fact.
Elias Real Estate learned the property was for sale and made an offer, also fully aware that Tseng was not the only owner, but also relying on Tseng’s representation that he was authorized to act on behalf of his brothers. On Oct. 1, 2004, Elias signed a counteroffer submitted by Tseng. For all appearances, the parties had a signed and binding contract.
Shortly after the contract was signed, Tseng called his brothers to verify whether they still wanted to sell the property; his brothers said no. Because of this change of heart, Elias sued the Tseng brothers for specific performance to have the court compel the brothers to sell the property pursuant to the signed contract. The Tseng brothers countersued Elias for declaratory relief by the court that they were not obligated to sell and sued the Fox Realty broker for negligence, indemnity, and declaratory relief.
The Tseng brothers argued that since the three brothers in China had not signed the purchase agreement nor authorized Arthur Tseng to act as their agent in the sale of the property, the sales agreement was unenforceable because it was not in writing as required by the statute of frauds.
After a bench trial, the trial court ruled that Tseng was authorized to sell the property on behalf of the brothers, that the authorization was in writing, and that the statute of frauds requirement was satisfied. The court found that Arthur Tseng was the managing partner of the partnership and that the property’s sale was in the ordinary course of the partnership’s business, making written authorization unnecessary. The court ordered the property be sold to Elias and ruled in favor of the Fox Realty broker on the negligence action. The buyer’s victory was short-lived as the Tseng brothers appealed the court’s conclusions regarding the statute of frauds, which requires that an agreement conferring agency on someone else to sell real property must be in writing.
Inexplicably, the trial court held that the purchase agreement was entered into with the express authorization and consent, both orally and in writing of all four brothers. Reviewing the trial transcript, the appellate court found no evidence admitted at trial that supported this finding. The buyer then argued that the trial court’s inference that the authorization was given in writing was reasonable. The appellate court rejected this leap in logic by holding that where there is an absence of evidence of a positive fact one cannot reasonably infer the existence of that fact.
The buyer then tried to trump the statute of frauds with partnership law. The Uniform Partnership Act provides that every partner is an agent of the partnership for the purpose of the partnership’s business. This agency means that the act of every partner in the course of the usual business of the partnership binds the partnership. A partner’s act may include executing a contract in the partnership’s name. UPA, however, limits this agency when a partner does not have the authority to act for the partnership in a particular matter and the other person knows that the partner has no such authority. Another part of UPA says that an act by a partner that is not in the usual business of the partnership does not bind the partnership unless authorized by the other partners.
Using information from similar Supreme Court cases involving the sale of partnership property, the appellate court emphasized the distinction between acts within the usual course of the particular business versus those that were outside the usual partnership business. The court found that acts that are within the usual course of partnership business are not subject to the statute of frauds while acts outside the usual course must still comply with the statute of frauds.
The appellate court held that the sale of real property was an act outside the ordinary course of the Tseng partnership’s business, reversing the trial court’s finding of the sale to be in the ordinary course of the business. The Tseng brothers were not in the business of holding real property for appreciation and resale, but rather they were in the business of importing and distributing clothes. Consequently, Arthur Tseng needed to have his brothers’ written authorization to sell the warehouse, an act outside the usual scope of their business. Without their signatures, the contract could not bind the brothers and the sale was invalid. The trial court’s order for specific performance was reversed on appeal.
While Arthur Tseng may have used a technicality to get out of the deal, the buyer became a victim who operated in good faith, only to lose the building when the brothers changed their minds. The failure to get a simple written authorization at the onset of the representation not only made the buyer’s purchase agreement unenforceable but also engulfed these parties in three years of litigation and appeals. The commercial real estate broker not only lost the sale, but became a defendant in a negligence lawsuit.
Laine T. Wagenseller is the founder of Wagenseller Law Firm, a real estate litigation firm in Los Angeles. You can contact him at (213) 996-8338 or firstname.lastname@example.org. This article first appeared in the JanFeb 2008 issue of Commercial Investment Real Estate magazine.
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